GF Securities has started premarketing its Hong Kong listing to raise $2 billion to $3 billion, the largest initial public offering in Asia so far this year, assuming it comes to fruition. One source close to the deal suggests it could even reach $4 billion.
The Guangzhou-based broker plans to sell up to 1.7 billion H shares or 20% of its enlarged share capital. The company plans to start roadshows on March 23, and to set the price as soon as March 31.
The last time a large Chinese broker tapped the Hong Kong IPO market was May 2013, when Galaxy Securities raised HK$8.31 billion ($1.1 billion). A smaller broker, Central China Securities, also raised $194 million in Hong Kong in June 2014.
Neither deal was a runaway success. Demand was lackluster and the industry was in the doldrums at the time, and the deals priced at the bottom of their expected ranges.
The backdrop for GF Securities is totally different: market sentiment toward A shares and Chinese brokers in general is positive, even euphoric. Overseas investors view Chinese brokers as a proxy for China’s financial liberalisation story, says a second source.
The benchmark Shanghai Stock Exchange Composite Index has surged 31% during the past four months, while the A shares of big brokers such as Citic Securities and Haitong Securities have jumped 91% and 76%, respectively, thanks to rising trading volumes and brisk margin financing business.
GF Securities has already received “decent” anchor demand ahead of the book-building, the second source said.
Bankers also hope that the deal will generate momentum for upcoming broker fundraisings, including a $2 billion IPO from Huatai Securities expected in June.
GF Capital (Hong Kong) and Goldman Sachs are joint sponsors of the GF Securities IPO, while ABC International, BoCom International, Bank of America Merrill Lynch, Deutsche Bank, HSBC, ICBC International and Morgan Stanley are joint bookrunners. Huatai Financial, JP Morgan and UBS are joint sponsors on the Huatai transaction.
Dilemma in pricing
A big challenge for GF Securities, however, is how to convince international investors that its shares will offer attractive valuations.
Investors are asking for a bigger discount to listed comparables because GF Securities is smaller and lacks their scale; by revenues, Citic is more than twice GF’s size.
In 2014, GF Securities’ total revenue rose 63.20% to Rmb13.39 billion, according to its annual report. The revenue of Citic and Haitong for the same year recorded as Rmb29.5 billion and Rmb18 billion, respectively.
“I think a discount of 30% to bigger securities houses such as Citic Securities would be reasonable and attractive,” said a Hong Kong-based portfolio manager at a mid-sized global funds company.
That said, however, the fund manager said Citic or Haiton shares – in Hong Kong or, thanks to Stock Connect and RQFII, in Shanghai – are still trading at reasonable valuations (in Hong Kong, at least) and therefore remain more attractive than a GF IPO. Their A shares are more expensive but the portfolio manager said momentum will continue to support them.
GF’s dilemma is if it sells its H shares at a deep discount, say 30%, the valuation gap between its own A and H shares will be too great.
A 30% discount means a 2015 forecast price-to-book of 1.4 to 1.7 for GF. That’s low compared to 2015 P/B of 2.44 for Citic and 2.05 for Haitong. GF’s current A shares trade at 3.65 times book value.
This implies steeply discounted H shares could price at a discount as much as 62% to GF’s A shares. Banking sources said the China Securities Regulatory Commission has relaxed restrictions around such gaps. It now allows financial institutions to offer H shares at a discount above 15%, instead of the previous 10%. But GF may need a far steeper discount, and risks falling afoul of CSRC’s tolerance.
Although the banker on the deal said a big discount to A-shares should make H-shares more appealing to prospective investors, some rival bankers unaffiliated with the deal doubt if this would work.
If the discount to A shares is too deep, it would bring selling pressure to the existing A shares. “That would not be welcomed by domestic shareholders or by the regulator,” said a banker.
Additional reporting by Suzy Waite